Fed Policy Becomes a Bourgeoisie Windfall

Includes: GLD, HYG, OIL, SPY, UDN, USO
by: Dr. Hugh Akston

This week marks the eight month anniversary of the Fed’s decision to pursue quantitative easing, which is a clever euphemism for the act of printing money. While the merits and necessity of this policy decision can be debated, the one thing that is certain is that owners of financial assets have benefited disproportionately compared to the rest of the country. The Fed’s newly printed cash is flowing into financial assets (stocks, bonds, commodity funds) and bank balance sheets as opposed to flowing into the real economy. Essentially what this is doing is making the owners of financial assets disproportionately more wealthy than those without financial assets.

If this were a “no harm no foul” situation where the non-owners were not at a detriment then maybe it is a non-issue, however, both the owners of financial assets and the non-owners are subject to the impact of the declining US dollar which is a byproduct of quantitative easing. In other words, while the Fed’s policies are propping up the value of financial assets I would argue that their policies are also exacerbating the divergence between asset owners and non-owners.

Since commodities are priced in US dollars, the weakening dollar makes commodities more expensive for Americans which will lead to greater input costs for the goods and services consumed. Therefore, while the owners of financial assets are able to offset these increasing costs through the rise in the value of their assets, those without financial assets are unable to do so. Let’s take a look at how things have moved since the Fed started their quantitative easing program. (Charts are from 3/18/09 – 11/13/09).

The S&P 500 stock Index (NYSEARCA:SPY) is up +37%.

High yield Bond Index (NYSEARCA:HYG) is up +25%.

Gold (NYSEARCA:GLD) is up +19%.

Now let’s take a look at how those without financial assets have been impacted.

The price of gasoline is up +44%

The price of oil is up +32%.

The US dollar is down -17% versus the Canadian dollar.

The US unemployment rate is up +20%.

In addition to being unfair to a large group of people, the effects of quantitative easing do little to improve our country’s situation. Ultimately the Fed is trying to force inflation to help ease the country’s debt load but given that the Fed cannot force the end destination for the created money they have only been able to create inflation in financial assets and not wages. Typically the owners of financial assets are wealthier than non-owners so these people are less likely to have an underwater mortgage, delinquent car payments, credit card debt, etc. meaning the Fed's policies are not helping those most in need.

Disclosure: No positions